Macro Economics

How do you get "economic recovery" out of these numbers?

Personal income decreased $0.1 billion, or less than 0.1 percent, and disposable personal income (DPI) decreased $0.2 billion, or less than 0.1 percent, in September, according to the Bureau of Economic Analysis.  Personal consumption expenditures (PCE) decreased $47.2 billion, or 0.5 percent.

That looks like flat income and down spending to me.

Oh wait - we have to read past the first two sentences, right? 

Let's do that.

Private wage and salary disbursements decreased $11.2 billion in September, in contrast to an increase of $10.1 billion in August.  Goods-producing industries' payrolls decreased $7.8 billion, compared with a decrease of $6.3 billion; manufacturing payrolls decreased $1.5 billion, compared with a decrease of $4.1 billion.  Services-producing industries' payrolls decreased $3.4 billion, in contrast to an increase of $16.4 billion.

Wait a minute.  I thought that income was flat?  We have a decrease, a decrease, a decrease and a decrease.  How do we get to flat with those?

Supplements to wages and salaries increased $0.1 billion in September, compared with an increase of $2.0 billion in August.

Proprietors' income increased $0.7 billion in September, compared with an increase of $3.4 billion in August. Farm proprietors' income decreased $1.6 billion, compared with a decrease of $1.2 billion.  Nonfarm proprietors' income increased $2.3 billion, compared with an increase of $4.6 billion.

Rental income of persons increased $5.4 billion in September, compared with an increase of $5.2 billion in August. Personal income receipts on assets (personal interest income plus personal dividend income) decreased $13.8 billion, the same decrease as in August.  Personal current transfer receipts increased $17.3 billion in September, compared with an increase of $9.6 billion in August.

Ah.

Small business income was down compared to August, rental incomes were basically flat (compared to prior month), but income receipts on assets (dividends + interest on assets) decreased.  Those are bad comps too.

The big Kahuna was government handouts, which was up big m/o/m.  There's the entry that kept PCI and DPI from collapsing.

Real PCE -- PCE adjusted to remove price changes -- decreased 0.6 percent in September, in contrast to an increase of 1.0 percent in August.

Consumers are not spending.

All in all, another bad report.  Not a disaster, but certainly not the stuff of which "economic recovery" is made.

The evidence continues to pile up......

Oh what a tangled web we weave....

This is the sort of thing that, in my opinion, makes meaningful economic recovery impossible.  (Click for a larger copy)

Here's what it says:

To continue to provide our customers with access to credit, we have had to adjust our pricing.

....

These changes include an increase in the variable APR for purchases to 29.99% and will take effect November 30, 2009. 

(It then goes on to say that if you pay on time you can get 10% of your interest charges back, which lowers the effective rate by about 3%.)

I have multiple copies of this letter, all on the same theme - 30% interest rates, vastly higher than they were.

The obvious message in this letter is simple: Those who are responsible and can pay their bills will be subsidizing those who cannot - that is, you, the responsible cardholder, will pay the deadbeat's bill!

Citibank has 92 million cards in circulation and is #4 in market share in terms of purchase volume, with 11.05% of the total.

Overall, consumers hold an average of 5.4 revolving (credit) cards.  Half of all undergraduates in college have 4 or more cards. 

Average card debt per household, including households that have no cards at all, is $8,329.  For households with one or more cards, it is $10,679, both figures at the end of 2008. 

Of the 73% of families with credit cards, 60.3% carried a balance.  This means that for those with balances, the average balance is nearly $18,000.

If the previous interest rate on those cards was around 20% and is now 29%, the average family with a balance (about 44% of all households) was paying $3,600 in interest charges previously, but now will be paying $5,220, and increase of $1,620 a year or $135.00 a month.

There are approximately 116 million households in the US.  As a consequence the decrease in disposable personal income attributable to this sort of interest rate change is approximately $113 billion, or a bit under 1% of GDP. 

And that's only the direct cost of the interest.  What cannot be measured is the impact on consumer spending that comes from changes in consumer behavior - that is, this is only the interest component of the change in rate. 

If this interest rate change prompts people to pay down just 25% of their credit card debt over two year's time the impact on GDP simply from paying down the debt as opposed to holding it level will raise the impact to approximately 1.9% of GDP, or about $270 billion annually in foregone consumer spending.

Good luck with your "recovery" thesis folks.

But I thought Bennie And The Feds programs were working?

The Producer Price Index for Finished Goods declined 0.6 percent in September, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This decrease followed a 1.7-percent rise in August and a 0.9-percent decline in July. In September, at the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.2 percent and the crude goods index fell 2.1 percent. On an unadjusted basis, from September 2008 to September 2009, prices for finished goods fell 4.8 percent, the tenth consecutive month of year-over-year declines. (See table A.)

Eek.

Intermediate prices rose but crude goods prices declined.  This shows "profit push" inflation being attempted by producers, but it's not working, as the finished goods numbers show.  Ex-food-and-energy the number was also negative, down 0.1%.

Food was down 0.1% after rising at 0.5% last month, but the trend is clearly still negative.  Energy, after spiking huge in August (up 8%) and generally being strong on balance all year (coming off the insane price spike in oil LAST year), was down 2.4% last month.

The 12 month change is the key number, and here is the problem, as one can see in the below table (mine):

The expectation, of course, was that we would continue to see a positive slope after the declines down to July.  Those hopes were dashed this morning.

Is this significant?  Hell yes, and here's why:

In short, despite the collapse in the dollar this year PPI continues to decline.  This is a particularly ominous development, as one would expect (given our import-dependence on balance) that we would see significant increases in both core and headline PPI given the relative decline in our currency. 

It is not happening, which belies the extreme underlying weakness in our economy at the producer level.

This phenomena, by the way, mirrors what happened in the 1930s. FDR intentionally devalued the currency (one of the "benefits" of being on a gold standard is that you can do that with the stroke of a pen!) but this failed to lift PPI, especially in the area of farm products.

He then sent government agencies into the field with rifles and gasoline cans, burning farmer's fields and shooting their livestock in an outrageously unlawful and Hitleresque attempt to boost producer prices by destroying people's private property and livelihood - all while people were literally starving due to inability to afford to buy food!

We're not (yet) seeing that sort of intervention in our markets, but I don't put it past our government as this economic mess continues to deteriorate.

What is clear is that our government and Federal Reserve's intentional devaluation of the currency is not working to boost prices on the producer level, and despite the claims of "green shoots" the turn back into inflationary conditions has not occurred.

Time for one of these....

According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace.

Gee, I wonder why?  Here's what the Fed's spew has been:

Despite more than a trillion dollars from the Fed and from the Troubled Asset Relief Program, "the banking system has still not fully recovered," New York Fed President Bill Dudley said in a speech this week.

The real problem is that banks continue to hide bad paper, encouraged in their outrageous and indeed I'd argue fraudulent accounting by the government and Fed.  By refusing to account for losses (such as blown real estate loans) they not only lock up inventory that should be sold off at the market price to a willing buyer (thereby deploying it productively) they also lock up credit capacity and raise everyone else's cost of credit in an outrageous cross-subsidization of blown loans with performing ones.

The solution today is the same as it was in 2007 and 2008, as I have written about repeatedly:

Force all institutions to recognize their marks.  If this results in insolvency, so be it.  Close those banks, including the really big ones, and sell off their assets into the market at whatever price they will bring.

The existing and sound regional and local banks, along with the credit unions, will step in to fill this gap.  They will profit, the cost of credit for legitimate, sound borrowers will come down, the monopoly of big banks will be broken and while you're at it lock up those who cooked the books for violations of Sarbanes-Oxley.

But no!  Both Congress and The Fed are more interested in protecting the guilty than resolving the problem and allowing the economy to recover.  They have been bought and paid for, and continue to spout the lie that in playing "extend and pretend" we can somehow manage to paper over all the bad debt without assigning anyone the loss and the economy will recover like nothing ever happened.

Santa Claus only exists in fairy tales folks.